SST - for better or worse ?

What is Sales & Service Tax (SST) in Malaysia? - SST Malaysia

Today, the Sales and Service Tax (SST) makes a comeback on our tax radar screen to replace the three years and two months old Goods and Services Tax (GST), which was implemented on April 1, 2015.

The abolition of the GST and replaced with SST is an election promise of the Pakatan Harapan manifesto.

It has been claimed that the GST is a regressive broad-based consumption tax that has burdened the low- and middle-income households amid the rising cost of living. The multi-stage tax levied on supply chains also caused cascading cost and price effects on goods and services. That said, the Finance Minister has acknowledged that the GST is an efficient and transparent tax.

Following the implementation of the SST, the Government will come to terms that the budget spending will have to be rationalised and realigned with the lower revenue collection from the SST to keep the lower budget deficit target on track.

The expected revenue collection from SST is RM21bil compared to an average of RM42.7bil per year in 2016-17 from GST.

During the period 2010-2014, the revenue collection from the SST, averaging RM14.8bil per year (the largest amount collected on record was RM17.2bil in 2014), of which 64% was contributed by the sales tax rate of 10% while the balance 36% from the service tax of 6%.

Faced with the revenue shortfall, the Government expects cost-savings, plugging of leakages, weeding out of corruption as well as the containment of the costs of projects would help to balance the financing gap between revenue and spending.

The sales tax rate (0%, 10% and 5% as well as a specific rate for petroleum) and service tax of 6% is imposed on consumers who use certain prescribed services. The taxable threshold for SST is set at annual revenue of RM500,000, the same threshold as GST, with the exception for eateries and restaurants at RM1.5mil.

As SST is levied only at a single stage of the supply chain, that is at the manufacturers or importers level and NOT at wholesalers, retailers and final consumers, it has cut off the number of registered tax persons and establishments from 476,023 companies under GST as of 15 July to an estimated 100,405 under SST.

The smaller number of registered establishments means no more compliance cost to about 85% of traders.

The distributive traders (wholesalers and retailers) will be hassle-free from cash flow problems, as they are no longer required to submit GST output tax while waiting to claim back the GST input tax. During GST, many traders imputed refunds into their pricing because of the delay in GST refunds. This was partly blamed for the cascading cost pass-through and price increases onto consumers.

For SST, 38% of the goods and services in the Consumer Price Index (CPI) basket are taxable compared to 60% under the GST.

It is estimated that up to RM70bil will be freed up to allow consumers to spend more.

Expanded scope

The proposed service tax regime has a narrower base (43.5% of services is taxable) compared to the GST (64.8% of services is taxable).

Medical insurance for individuals, service charges from hotel, clubs and restaurants as well as household’s electricity usage between 300kWh and 600kWh are not taxable. However, the scope of the new SST has been expanded compared to the previous SST. Among them are gaming, domestic flights (excluding rural air services), IT services, insurance and takaful for individuals, more telecommunication services and preparation of food and beverage services as well as electricity supply (household usage above 600kWh).

For hospitality services, the proposed service tax lowered the registration threshold of general restaurants (not attached with hotel) from an annual revenue of RM3mil under old service tax regime to RM1.5mil, resulting in expanded coverage of more restaurants.

Private hospital services will be excluded under the new SST regime.

How does SST affect consumers?

Technically speaking, the revenue shortfall of RM23bil between SST and GST is a form of “income transfer” from the Government to households and businesses. This is equivalent to tax cuts to support consumer spending.

Will it lead to higher consumer prices?

The contentious issue is will the SST burden households more than that of the GST? It must be noted that the cost of living not only encompasses prices paid for goods and services but also housing, transportation, medical and other living expenses.

The degree of sales tax impact would depend on the cost and margin (mark-up) of businesses along the supply chain before reaching end-consumers.

The coverage and scope of tax imposed also matter.

As the price paid by consumers is embedded in the selling price, this gives rise to psychology effect that sales tax is somewhat better off than GST.

The good news to consumers is that 38% of the goods and services in the Consumer Price Index (CPI) basket are taxable compared to the 60% under the GST.

Technically speaking, monthly headline inflation, as measured by the Consumer Price Index, is likely to show a flat growth or even declines in the months ahead.

It must be noted that consumers should compare prices before GST versus the three-month tax holiday (June-August).

Generally, consumers perceived that prices should either come down or remained unchanged as the sales tax is levied on manufacturers.

On average, some items (electrical appliances and big ticket items such as cars) would be costlier when compared to GST and some may come down (new items exempted from SST).

Nevertheless, we caution that consumers may experience some price increases, as prices generally did not come as much following the removal of GST in June.

There are concerns that prices may still go up in September when the new SST kicks in as irresponsible traders may take advantage to increase prices further.

Household consumption, which got a big boost during the three-month tax holiday in June-August, could see some normalisation in spending.

The smooth implementation of the new SST, accompanied by strict enforcement of price checks and the curbing of profiteering, especially for essentials goods and services consumed by B40 income households, are crucial to keep the level of general prices stable.

Strong consumer activism with the support of The Federation of Malaysian Consumers Association and the Consumers Association Penang as well as the media must work together to help in price surveillance and protect consumers’ interest.

Credit to Lee Heng Guie - comment

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The rich are becoming richer

They are becoming richer at a faster rate too

DON’T the rich always grow richer, while the poor well, remain poor.

If you’re already disheartened, it gets worst. The rich are getting richer, and at a faster rate too.

A 36-page report released by the Boston Consulting Group (BCG) last month showed that global personal financial wealth grew by 12% in 2017 to US$201.9 trillion.

This total, roughly 2.5 times as large as the world’s gross domestic product (GDP) for the year (US$81 trillion), more than doubled the previous year’s rate, when global wealth rose by 4%.

It also represented the strongest annual growth rate in the past five years in dollar terms.

“The main drivers were the bull market environment in all major economies, with wealth in equities and investment funds showing by far the strongest growth and the significant strengthening of most major currencies against the dollar,” said BCG in the report.

The increasing millionaires and billionaires now hold almost half of global personal wealth, up from slightly less than 45% in 2012, says BCG. In North America, which had US$86.1 trillion of total wealth, 42% of investable capital is held by people with more than US$5mil in assets. Investable assets include equities, investment funds, cash and bonds

In terms of asset classes, US$121.6 trillion (60%) of global wealth took the form of investable assets – mainly equities, investment funds, currency and deposits, and bonds, with the remaining US$80.3 trillion (40%) held in non-investable or low-liquidity assets such as life insurance, pensions funds, and equity in unquoted companies.

Residents of North America held over 40% of global personal wealth, followed by residents of Western Europe, with 22%. The strongest region of growth was Asia, which posted a 19% increase. All wealth segments grew robustly, but high growth rates were especially prevalent in the uppermost wealth segments.

The market sizing review encompasses 97 countries that collectively account for 98% of the world’s gross domestic product.

The personal wealth bands are generally measured as such:

1. Retail: below US$250,000

2. Affluent: between US$250,000 to US$1mil

3. Lower High Net Worth (HNW): between US$1mil and US$20mil

4. Upper HNW: between US$20mil and US$100mil

5. Ultra HNW: above US$100mil

Everybody is getting richer

The US is home to the largest number of people with more than US$20mil. Globally, the classes of the ultra-rich are expected to reach 671,000 by 2022.

Meanwhile, the Middle East is the region with the greatest share of wealth held in investable assets US$3.1 trillion of a total US$3.8 trillion. Western European residents held 56% in currency and deposits, while in North America the attention was on equities and investment funds, with 62% of US$47 trillion of investable wealth parked in those assets.

Should personal wealth creation continues at the rate of the past few years, BCG forecasts a compounded annual growth rate of about 7% from 2017 to 2022, in US dollar.

Events like stock market corrections and geopolitical uncertainties could knock that down to 4%.

In a worse-case scenario, such as a major economic crisis, global wealth might produce a compound growth rate of only 1% over five years, the study found.

BCG says opportunities abound for wealth managers seeking to increase their focus on different client segments.

For example, despite being far apart on the wealth spectrum, both the above US$20mil segment (upper HNW and ultra HNW) and the affluent segment are attractive because they represent very large wealth pools with high growth rates.

In 2017, the upper HNW and ultra HNW segments held more than US$26 trillion in investable wealth.

US residents held over 30% of this wealth, making the US easily the largest country of origin.

Other economic areas with large pools of ultra HNW investable assets include developing markets such as China (in second place), Hong Kong, India, Russia and Brazil, and developed markets such as Germany (in third place), France and Italy.

The share of wealth held by upper HNW and ultra HNW individuals varies widely aong the top 15 countries, ranging from 47% in Hong Kong to 8% in Japan.

Over the next five years, the upper HNW and ultra HNW segments wealth is likely to post the highest growth across all regions.

“Financial institutions looking to acquire and serve these segments will need to bring a broad international skill set to the table,” said BCG.

Affluent individuals

Afluent individuals is a segment whose population is burgeoning, hold a large and increasing amount of the world’s personal wealth at US$17.3 trillion or 14% of investable assets in 2017. (see chart)

This group of about 72 million people represents the growing middle class and many of its members will become the millionaires of tomorrow.

“We expect the wealth of this segment to post a compound annual growth rate (CAGR) of around 7% over the next five years, increasing its pool of wealth to nearly US$25 trillion. To successfully tap into this segment, wealth managers must have at their disposal an efficient service model and significant skill in and innovative digital technologies,” said BCG.

Entrepreneurs

The entrepreneur segment represents another attractive opportunity for wealth managers to tap into money in motion and provide needed services.

“We expect these individuals, who have equity in their own companies – recorded as unquoted equities (non-investable wealth) – to significantly increase their pool of investable assets, by liquidating some or all of their equity through sales and by earning new wealth through their entrepreneurial activities. The largest pools of entrepreneurial wealth are in the US, France, Italy and Japan.  

Asia

Personal wealth in Asia grew by 19% to US$36.5 trillion, with residents of China holding nearly 57% of that amount, and the region registered per capita wealth of US$13,000. Although the asset allocation share of equities ad investment funds has grown over the past five years (from 22% in 2012 to 31% in 2017), Asia remains a cash-and-deposit-heavy region, with 44% of personal wealth held in this asset class. We project regional wealth to grow over the next five years at a CAGR of 12%.

Meanwhile Switzerland remains the largest offshore centre, domiciling US$2.3 trillion in personal wealth in the country. The next largest booking centres are Hong Kong (US$1.1 trillion) and Singapore (US$0.9 trillion) which have grown at yearly rates of 11% and 10% respectively – more than three times the rate (3%) of Switzerland over the past five years.

Over the next five years, BCG feels off

By Tee Lin Say, Starbiz

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US government monitoring its oversea citizens by Foreign Account Tax Compliance Act (FATCA)

Malaysia to ink pact in line with FATCA

KUALA LUMPUR: All local financial institutions will be required to declare their American customers to the United States Internal Revenue Service (IRS) under a new agreement to catch its tax evaders who hide their money overseas.

Malaysia will be entering into an inter-governmental agreement with the US in line with the implementation of its Foreign Account Tax Compliance Act (Fatca).

Inland Revenue Board (IRB) chief executive officer Tan Sri Dr Mohd Shukor Mahfar said Malaysia would fully enforce all the requirements of Fatca by September next year.

“Fatca is a very interesting move by the US to monitor its citizens who have income outside of the country. The rest of the world is required to abide by Fatca or the US government will impose a withholding tax of 30%.

“So, IRB, as the tax authority for Malaysia, along with Bank Negara, will be signing the agreement,” he said at the National Tax Conference 2014 here yesterday.

The tax is imposed by withholding earnings on the funds in the account of the US citizen and paid to its government.

Under the Act, all foreign financial institutions must declare the financial holdings of any US citizen or cough up a 30% withholding tax on their own.

The US imposes income tax on its citizens, regardless of which country they reside in.

Many countries, including Switzerland which was previously considered a haven for those who sought to keep money overseas in secrecy, have signed the agreement.

Other countries listed by the US Treasury website are Britain, Australia and France while Indonesia, Thailand, Singapore and China are those which have consented to entering the agreement.

Earlier, Second Finance Minister Datuk Seri Ahmad Husni Hanadzlah said the proposed amendment to Inland Revenue Board of Malaysia Act would be tabled at the Dewan Rakyat sitting in October.

Previously, a controversy had erupted when it was alleged that the amendments would transform the tax agency into a firm that invested taxes collected on behalf of the Government.

The Finance Ministry later denied this, adding that all direct taxes collected by the board would be channelled to the Federal Consolidated Fund.

By P. Aruna The Star/Asian News Network

IRS Notes:

Foreign Account Tax Compliance Act

FATCA Current Alerts and Other News
The provisions commonly known as the Foreign Account Tax Compliance Act (FATCA) became law in March 2010.
FATCA targets tax non-compliance by U.S. taxpayers with foreign accounts
FATCA focuses on reporting:
	By U.S. taxpayers about certain foreign financial accounts and offshore assets
	By foreign financial institutions about financial accounts held by U.S. taxpayers or foreign entities in which U.S. taxpayers hold a substantial ownership interest
The objective of FATCA is the reporting of foreign financial assets; withholding is the cost of not reporting.

Individuals		Financial Institutions		Governments
U.S. individual taxpayers must report information about certain foreign financial accounts and offshore assets on Form 8938 and attach it to their income tax return, if the total asset value exceeds the appropriate reporting threshold. Form 8938 reporting is in addition to FBAR reporting. > Learn More ...		Foreign To avoid being withheld upon, a foreign financial institution may register with the IRS, obtain a Global Intermediary Identification Number (GIIN) and report certain information on U.S. accounts to the IRS. > Learn More... U.S. U.S. financial institutions and other U.S withholding agents must both withhold 30% on certain payments to foreign entities that do not document their FATCA status and report information about certain non-financial foreign entities. > Learn More...		If a jurisdiction enters into an Intergovernmental Agreement (IGA) to implement FATCA, the reporting and other compliance burdens on the financial institutions in the jurisdiction may be simplified. Such financial institutions will not be subject to withholding under FATCA. > Learn More ...

Falling foul of the tax law

Many tax offences arise due to failure to correctly discharge filing obligation

MOST of us would not ever think of cheating when we file our tax returns. This does not however mean that one cannot fall foul of the tax law. This is in part due to the fact that tax laws generally are amongst the most complex of a country's set of laws, and our own tax law is no exception.

Often it is not the complexity of the law that catches one out but simple failure to follow procedures, the most common of which involves keeping to set time frames, whether in the filing of returns, paying of one's taxes or providing information to the tax man.

Thus the instances when one can be in breach of the tax law are quite varied and extensive. All such breaches are serious offences, some more serious than others.

Our tax law adopts the declaratory system one is required to declare income via the filing of returns to the tax authority. Many tax offences arise due to failure to correctly discharge this filing obligation.

The most obvious offence is not filing a tax return, or not filing within the stipulated time frame.

An Inland Revenue Board officer helping taxpayers filing their submission

.

In filing the return, an offence is committed if the return filed is incorrect. A return would typically be incorrect if income is omitted or a lesser than actual sum is included. Likewise, more deductions claimed than one is entitled to would result in incorrect filing.

An innocent mistake may not be regarded as cheating but it is still an offence especially when it results in less tax being charged. Generally the severity of penalties varies with the level of the offence's blameworthiness.

An offence involving willful intent to defraud would be amongst the most serious, bringing about the prospect of imprisonment if convicted. Details of the range of penalties for various offences are listed on the official website of the Inland Revenue Board (www.hasil.org.my).

An offence of “not taking reasonable care” was introduced with the implementation of the self-assessment system. This is entirely justifiable as the filing of a tax return is in law the making of an assessment on oneself upon which tax becomes payable.

The aim is to ensure that a “degree of care or conscientiousness” is exercised in connection with the preparation and filing of a tax return. It is intended to prevent the adoption of a reckless or careless approach to the task and to penalise any breach where it results in tax underpaid.

Thus with this standard, claiming a deduction for a capital expense would constitute an offence of not taking reasonable care, even where its capital nature is not quite obvious. The law presumes that a reasonable person would seek to determine the true nature of the expense.

The “reasonable care” requirement was also introduced by Australia when it implemented self-assessment some years before we did. Since the standard is derived from the common law on negligence, features of the “reasonable care” standard adopted in Australia should apply equally to the Malaysian provision.

However, a taxpayer who fails to take “reasonable care” under the Malaysian law is liable to prosecution and, if convicted, is liable to a fine of not less than RM2,000 and not more than RM20,000 or to imprisonment for a term not exceeding three years or to both. This is in fact harsher than an offence of willful intent to evade tax.

There seems to be an obvious anomaly here as the offence of failing to take reasonable care does not involve bad intent, what lawyers would term mens rea. Australia treats the offence as amongst the least culpable of tax offences, certainly less so than intentional disregard of taxation law.

A controversy resulting in considerable bemusement arose in Australia recently where its Appeals Tribunal in a tax appeal ruled that a taxpayer in seeking the advice of an accountant had not taken reasonable care; he should have used the services of a lawyer. Understandably, this resulted in consternation and dismay amongst both tax accountants as well as tax lawyers for quite different reasons; the latter over concerns that their numbers are fewer in this specialism.

A further difference is that the Australian law requires both the taxpayer and his advisor to take “reasonable care”, whereas the “reasonable care” standard under Malaysian law applies only to the “person who advises or assist” the taxpayer but not the taxpayer himself. Why this is so is not clear.

The Australian “reasonable care” standard is coupled with the “reasonably arguable case” standard.

Where the law is unclear and there is room for a real and rational difference of position between two views, and the taxpayer adopts the view, which ultimately is seen to be wrong, he would in strictness have made an incorrect return.

In Australia, no penalty is imposed where a “reasonably arguable case” is made out.
This recognises that the intricacies of tax law often does mean that the taxpayer could be forced to take a contentious position, one where the arguments could go either way. If the weight of arguments is fairly balanced, imposing a penalty for taking an incorrect position would seem manifestly unfair.

Our tax authorities do exercise discretion in considering the question of penalties despite the absence of the equivalent Australian standard.

However, this does not detract from the fact that the taxpayer will always prefer to see his right spelled out in the law. On the basis of balance of rights, there seems to be no cogent reason why the “reasonably arguable case” standard should be left out from the Malaysian tax legislation.

Kang Beng Hoe is an executive director of TAXAND MALAYSIA Sdn Bhd.The views expressed do not necessarily represent those of the firm. Readers should seek specific professional advice before acting on the views.

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A promising Malaysian tax budget for 2013 this Friday?

Broadening income tax bracket will benefit the rakyat as a whole

IN the next few days, the Finance Minister will share with the rakyat the financial health of the country and the Government’s proposed budget for the next 12 months.

With the mission of “Driving Transformation Towards a Developed Nation”, the Government would have the unenviable position of balancing the economy of the country amidst the uncertainties in the external market, as well as ensuring that the plight and wishes of its rakyat are not forgotten, especially in these challenging times.

As tax consultants, we have the opportunity to hear from our clients their expectations and hopes for the upcoming budget. This article aims to analyse some of these expectations as well as the writers’ views as fellow taxpayers and as a rakyat.

Lower taxes

Looking back at the past four budgets, the Government has introduced various ways of lowering the taxes for resident individuals. (See graphics)

While a reduction in tax rate is always a welcome relief to any taxpayer, it would still depend on which level the rates are reduced as it may only benefit certain taxpayers as can be seen in 2010 whereby only those in the highest tax bracket benefited from the 1% tax rate reduction.

What the Government has not introduced is the broadening of the income tax bracket, especially at the lower rates, which will not only benefit those from the lower and middle-income group but the rakyat as a whole, with a higher disposable income. (See tables)

The tax relief available in respect of premiums for education or medical insurance has not been reviewed since 2000. Further, the RM3,000 tax relief limit covers both education and medical insurance.

As education and healthcare are essential for every rakyat and his family, the Government should consider granting tax relief for each category of the insurance premium separately – one for education and another relief for medical insurance.

The Government has also not reviewed the child relief, which has remained at RM1,000 per child below 18 years of age since 2004. Any parent will vouch that providing for a child’s wellbeing is neither easy nor cheap. Any increase in child relief for tax purposes would be welcomed.

Affordable homes

Over the last few months, the news of spiralling property prices has been hitting the media.

Currently, the Real Property Gains Tax (RPGT) regime for residents and non-residents are the same, i.e. tax is charged on the gain from sale of real property depending on the duration of ownership of the real property regardless of the residence status of the seller.

Genuine resident home buyers, particularly young families who do not yet have high disposable income, are usually at the losing end compared to non-resident buyers, who are usually buyers with higher purchasing power and who perhaps have more speculative intentions.

In the past, the Government has introduced incentives such as stamp duty exemptions. However, the threshold to qualify for the exemption is limited to those properties which have value not exceeding RM350,000, thus leaving young city folks hard-pressed to find homes within this range given the spiralling property prices.

An effective measure previously introduced by the Government was the deduction in respect of interest expended by individuals to finance the purchase of residential property.

Unfortunately, this incentive was only valid for purchases whereby the sale and purchase agreement was executed within a specific period of time, which has since lapsed. The Government could re-introduce this incentive.

The Government could also consider imposing different RPGT rates for residents and non-residents. If there is a concern that foreign investors will shy away as a result, conditions could be put in place for non-residents to be eligible for the resident rates, for example:

 

• having stayed in Malaysia for a number of years or
• set up business operations in Malaysia for a number of years, etc.

Alternatively, to quell speculative transactions, the Government could consider increasing the RPGT rates for disposals made within five years from the date of acquisition of the property, which is currently at 10% and 5%, to perhaps the present corporate tax rate of 25%. Disposal after five years will be exempted from RPGT. Genuine home buyers should not be adversely affected by this measure.

A similar measure, although from a stamp duty perspective, was adopted by a neighbouring country whereby affected buyers are required to pay an Additional Buyer’s Stamp Duty on top of the existing Buyer’s Stamp Duty. The affected buyers are mainly foreigners and non-individuals, or individuals who owned more than one or two residential properties. This is also an avenue for our Government to consider.

By NEOH BENG GUAN and NG SUE LYNN

·Neoh Beng Guan is executive director of KPMG Tax Services Sdn Bhd while Ng Sue Lynn is director.

New tax rules create a quandary for lending to family members

CHARGING below market interest gets you in trouble with the taxman or the law against money-lending.

“Neither a borrower nor a lender be”.

This advice by Polonius, the King's adviser to his son in Shakespeare's Hamlet remains good advice today.

But good advice, it is said, is least heeded when most needed.

Lending money gives rise to risk of default, a stark reminder of today's global phenomenon.

At a personal level, it can lead to the loss of a friend, a relative remaining one only by virtue of blood ties.

The term “relative” is defined in our tax law to include a wide network of family members including a nephew, a niece, a cousin and somewhat incredibly “an ancestor or lineal descendant.”

How the latter is to be determined, the law has not made clear, leaving the conundrum perhaps to the wisdom of the courts.

In many cases, loans between family members are below-market loans.

By this is meant that the lender charges either no interest or a rate that is less than the “market rate” also known as the “arm's length” rate.

This is in breach of the tax law, which requires a loan to a related party including a relative to be at the market rate of interest.

This requirement has been made clear by a recent Government Gazette setting out rules on transfer pricing as the rules do not state that such loans must be in the context of carrying on a business or must be used in a business.

Thus when you make a below market loan to a relative, driven entirely by altruistic reasons and devoid of any business considerations, the tax law treats you as having derived imputed' income from your borrower and would proceed to levy tax on that imputed income.

This phantom income on which tax is levied equals the market rate you should have charged less the interest you actually charged.

This means that you must report the imputed interest as taxable income in your tax return failing which you will be in default of the tax law.

If you were to consider avoiding this unfavourable tax outcome by being somewhat hard-hearted and charged interest to your relative, then you are in breach of the Moneylenders Act.

The law here precludes the charging of any interest since you are not a licensed moneylender.

A moneylender under this law is any person who “lends a sum of money to a borrower in consideration of a larger sum being repaid to him”.

So this puts you, the lender, setting out to help a financially distressed relative, on the proverbial “horns of a dilemma”.

You are in the untenable position of breaking one or the other law.

This state of affairs seems to run counter to any coherent tax policy objective.

In the United States, the lending of money below market rate historically occurred without tax consequences.

Through a series of court cases over several years culminating in a case in 1984, the court held that the lender's right to receive interest is a “valuable property right” and where such a right is transferred by way of an interest-free loan, it is in the nature of a gift subject to “gift tax”.

But the point here is that the taxing of the interest-free loan is because of the existence of a gift tax.

We do not have such a tax in Malaysia and taxing imputed interest, as this measure is generally known, between related individuals not conducting business transactions, is a retrograde step.

We had long repealed a similar imputed income provision, which treated a person owning an unoccupied house as having an income source, even where no income exist.

Business related loans follow similar concepts, but here the law is entirely understandable and justified where the intent is to avoid tax.

If company A makes an interest-free loan to its subsidiary which is a tax exempt pioneer company, then this leads to tax results which are not reflective of transactions between commercial parties.

Not charging interest inflates the subsidiary's tax exempt profits enhancing its capacity to pay tax exempt dividends, without a corresponding tax liability on the lending parent had interest been charged.

Here the existence of a “tax shelter” where one entity has either tax exempt status or a tax loss position, can lead to tax leakage, the reason for the arm's length rule.

Interest-free business lending between related companies can also lead to anomalous results.

This is a consequence of the divergence between the tax treatment and the new accounting standards for public listed companies.

The taxman will require tax to be imposed on the lender on the imputed market rate interest.

Whereas if such a company lends RM100,000 to its subsidiary interest - free to be repaid in equal instalment over five years and the market interest rate is 10%, the accounts will reflect the lender as having a debt of RM75,816, which is the discounted amount at the inception of the loan.

Over the period of the loan, the borrower will be shown as having paid interest of RM 24,184 which will equal the discount.

Thus the books of both companies will be recorded as if interest had been paid as shown in the table.

Since these are book entries and there are no costs incurred or income earned, they have no tax consequence.

This reflects the economic substance of the loan transaction as distinct from the strict legal substance, the mainstay for tax.

This fundamental difference in concept tends to make attempts at convergence between the accounting and tax treatments particularly problematic.

The more pressing issue is doing away with the taxing of imputed interest on non-business lending between relatives, a measure which seems unjustified.

Kang Beng Hoe is an executive director of TAXAND MALAYSIA Sdn Bhd, a member firm of TAXAND, the first global organisation of independent tax firms. The views expressed do not necessarily represent those of the firm. Readers should seek specific professional advice before acting on the views. Beng Hoe can be contacted at kbh@taxand.com.my